LabCorp Hosts DARK REPORT For Burlington Site Visit

Recent capital infusion provides money and motivation to reshape national laboratory

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CEO SUMMARY: During the years of sustained bad financial news that dogged the major laboratories, there was a reluctance to speak publicly about any aspect of the laboratory business. That era seems to be ending, as LabCorp and the other national laboratories become friendlier and more accessible. A trip to LabCorp’s headquarters in Burlington, North Carolina demonstrates the new attitude of openness.

DURING A RECENT VISIT to laboratories in North Carolina, THE DARK REPORT was invited to visit corporate headquarters at Laboratory Corporation of America in Burlington.

Clients of THE DARK REPORT know our publication has regularly taken management of the national laboratories to task for a variety of poor business decisions made in recent years. Thus, an invitation for a red carpet tour of LabCorp headquarters and access to senior executives was unexpected.

Whether due to southern hospitality or a genuine interest in building good bridges with the laboratory public, LabCorp executives provided THE DARK REPORT with an extensive tour and candid answers to a variety of difficult questions.

Background Understanding

Information shared provides back- ground understanding to many activities under way at LabCorp. In future stories and assessments of the laboratory industry, our readers will benefit from the insights provided to THE DARK REPORT during this site visit.

“Our convertible preferred stock offering was more than just an infusion of capital,” stated Brad Smith, Executive Vice President and General Counsel. “It was a sign of support by our shareholders. Not only did we raise the $500 million, but it was oversubscribed by another $200 million.”

Turnaround Year

According to Smith, LabCorp believes that 1997 is their turnaround year. “We see indications that our financial performance will demonstrate regular improvement,” he explained. “We are exerting better discipline in contract pricing for tests. There is evidence that further declines in private pay reimbursement will be minimal in many markets. If this proves true, then operating margins at LabCorp should improve.”

Assuming that Smith’s observations prove accurate, that is good news for the entire laboratory industry. It is widely recognized that capitated rates under $1.50 PMPM (per member per month) fail to cover the full cost of providing laboratory testing. Any success by the national laboratories at firming up pricing levels will help restore financial solvency to the entire laboratory industry.

In Burlington, LabCorp operates probably the largest laboratory in the world. It accessions approximately 30,000 specimens per night in a building of 200,000 square feet. Although transport robots deliver specimens and supplies throughout the facility, advanced automation has not yet been installed. “We are studying full laboratory automation and automated instrument modules,” said Pam Sherry, Investor Relations Director. “Given our view of the current benefits of complete automation, such projects are not an immediate priority.”

Esoteric Testing Laboratory

Next THE DARK REPORT visited what LabCorp considers their crown jewel: the esoteric testing laboratory at Research Triangle Park near Raleigh, North Carolina. It is located about 50 miles from Burlington. Steven Anderson, Ph.D., Director of Oncology and Infectious Diseases, showed THE DARK REPORT a variety of cutting-edge assays performed at the facility. It was particularly fascinating to watch how the Affymetrix GeneChip® performed DNA probe arrays and PCR-based assays for HIV genotyping.

“We recently acquired this technology,” noted Anderson. “It is one of the earliest applications where a biosample is placed on a silicon chip, the test is performed on the chip, then the silicon chip reports the results to the lab information system.”

Overall Impression

With $1.6 billion in annual revenue, LabCorp is still a competitor to be reckoned with. Given the time spent with LabCorp executives and the visits to various company facilities, it can be said that a different management attitude is taking root within this company. The clinical laboratory industry can expect to see LabCorp evolve in unexpected ways.

The willingness to improve public communication is just one sign of the changes taking place. THE DARK REPORT predicts that some innovative joint ventures announced during the next 18 months may reinforce the different management philosophy now emerging at LabCorp.

LabCorp CEO Backs His Bets With Action

ONE VALUABLE INSIGHT INTO THE CHARACTER of LabCorp CEO Tom Mac Mahon relates to his willingness to pursue his vision of business opportunity.

“Most people do not realize that, at the time when PCR (polymerase chain reaction) technology was new and unproven, Mac Mahon was an early advocate for PCR technology,” explained Brad Smith, Executive Vice President and General Counsel at LabCorp. “He took the risk of championing this technology before its tremendous potential was recognized by the diagnostic world, leading the effort to encourage Roche to obtain exclusive rights to PCR technology.

“Mac Mahon pushed this in the late 1980s,” he continued. “It proved to be a wise business decision for Roche. The explosion in PCR testing applications in recent years now benefits Roche in a variety of ways.”

Many laboratory executives are unaware that Mac Mahon’s career background is outside the clinical laboratory. Starting with Roche after graduation from college in the late 1960s, Mac Mahon moved through various executive assignments involving Diagnostics. As a member of Roche’s Worldwide Diagnostics Executive Committee from 1988 to 1995, Mac Mahon had over-sight responsibility for Roche Biomedical Laboratories (which became LabCorp).

Mac Mahon’s willingness to back his vision with action, combined with management experience gained outside the laboratory industry, may provide LabCorp with the kind of fresh management thinking which is uncommon within the clinical laboratory industry.


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